The reverse mortgage is a great product. But like all products, it is not a fit for every consumer.
And while the product brings many advantages to aging homeowners, there can be downsides as well depending on the prospective borrower’s situation.
Here is a look at six reverse mortgage disadvantages to weigh if you are considering a home equity conversion mortgage (HECM) loan.
A reverse mortgage is not for everyone.
A reverse mortgage is a loan for homeowners age 62 and over, which allows them to borrow against the equity in their homes.
This explains its name: instead of a regular mortgage, where a person borrows money to buy a house, a reverse mortgage lets a person borrow money from the house that he or she already owns.
Yet just because a homeowner meets the eligibility requirements and wants to capitalize on a reverse mortgage’s various benefits does not mean the product is right for them.
For one thing, while borrowers can use a reverse mortgage to satisfy a range of purposes, its foundational function is to help seniors remain in their homes.
Therefore, a homeowner who does not plan to remain in his or her home might not want this product.
Additionally, the borrower in question should not merely want to remain in his or her home but should be able to.
Using a reverse mortgage to fund an in-home caregiver might be worthwhile, but some seniors are simply unable to remain in their homes safely, even with an influx of cash, due to mobility needs or other repairs or maintenance that are not practical to attain.
There are costs involved
A senior who wants to convert a portion of his or her home equity into cash may be right for a reverse mortgage.
The product can be a good resource for some prospective borrowers, but the loan does require financial commitment even if it does not require monthly mortgage payments.
Specifically, the borrower must pay property taxes, mortgage insurance and maintain the upkeep of the property.
That means a borrower must have access to enough funds independent of the reverse mortgage simply to afford the reverse mortgage.
In other words, a reverse mortgage won’t eliminate home-related expenses and thus might not be the best option if the borrower’s cash flow is extremely limited.
A reverse mortgage can reduce your children’s inheritance.
A major selling point of the reverse mortgage is that the loan does not need to be repaid until after the borrower dies or moves out of the house permanently.
But the inherent flip side is that once the borrower is out of the house, the loan must be repaid. In many cases, the borrower’s estate will repay the loan through the sale of the home.
However, in situations where the family wishes to keep the home, they must repay the loan through other means.
The loan balance rises every month.
One of the major selling points of a reverse mortgage is that the loan does not have to be repaid until the borrower is permanently out of the house.
This makes it an ideal product for many aging seniors’ intent on aging in place.
The downside, of course, is that while the balance on a normal loan declines each month, the balance on a reverse mortgage increases each month.
Because the loan does not have to be repaid until the borrower is out of the house, this distinction is mostly irrelevant.
However, on the remote chance that something goes wrong and a borrower does not meet the obligations of the loan, the lender can call the loan due, leaving the borrower in a huge hole.
A reverse mortgage can cause complications for some borrowers who need long-term care.
Many borrowers who take out a reverse mortgage intend to stay in their houses for the rest of their lives.
But borrowers who reach a point where they need to move into a long-term care facility might have to sell their house before they want to.
So, if a borrower seems on pace to enter a long-term care facility, simply accessing a reverse mortgage won’t keep that person in their home.
A reverse mortgage is not the best loan option in every scenario.
Here at ReverseMortgageReviews.org, we specialize completely in the HUD-insured Home Equity Conversion Mortgage, or HECM Lender Reviews.
Reverse mortgages do come with upfront costs.
While many of the fees and interest charges associated with reverse mortgages, such as closing costs and fees, are akin to those a borrower would face in taking out a forward mortgage or alternative product, HECM loans also carry required mortgage insurance provided by the Federal Housing Administration.
This insurance comes with an upfront cost as well as an ongoing cost throughout the course of the loan.
While the insurance provides protections and benefits, such as the HECM’s non-recourse feature, there may be alternatives, such as downsizing, that are worth exploring.